The Moral Hazard of Hedge Fund Regulation

The government cannot effectively regulate the hedge fund industry and it’s a good thing too, Robert Steel said yesterday. The setting was a Manhattan Institute conference. Steel, a former Goldman Sachs executive who is now the Treasury Department’s top domestic finance official, raised two original arguments against hedge fund registration and regulation. Since this is something we talk about a lot around here we found ourselves a bit surprised that we hadn’t heard these ideas before.

Steel, the Treasury undersecretary for domestic finance, also said it would be costly and impossible to train enough people to keep tabs on some 8,000 hedge funds. “I don't like the moral hazard of communicating a government all-clear,” Steel said at a conference hosted by the Manhattan Institute in New York today. The risk is that regulation “communicates confidence in a product that is riskier than normal investors should get involved in,” he said.